British Finance Minister Jeremy Hunt to Deliver Spring Budget
British Finance Minister Jeremy Hunt said earlier this month the U.K. would not enter a recession this year. Economists expect Hunt to use a small fiscal windfall to deliver a modest package of tax cuts at his Spring Budget on Wednesday. However, there are big questions over tax cuts heading into Wednesday’s statement.
Raja suggested the finance minister will err on the side of caution in loosening fiscal policy, favoring supply side support over boosting demand. Tax cuts to national insurance contributions (NICs) and changes to child benefits are more likely to come in the Spring Budget, in contrast to earlier expectations of income tax cuts.
Political Pressure and Economic Challenges
Heading into what is likely the Conservative government’s last fiscal event before the upcoming General Election, Hunt is under pressure to offer a sweetener to voters as his party trails the main opposition Labour Party. However, he must navigate the constraints of fragile public finances and a stagnant economy that recently entered a modest technical recession.
On the upside, inflation has fallen faster than anticipated, and market expectations for interest rates have decreased. The Treasury has pre-announced plans to deliver up to £1.8 billion worth of benefits by boosting public sector productivity, contributing towards potential annual savings of up to £20 billion by returning to pre-pandemic productivity levels.
Focus on Research and Development
Hunt will announce £360 million in funding to boost research and development (R&D) and manufacturing projects across the life sciences, automotive, and aerospace sectors. Increased fiscal headroom provides room for potential tax cuts, with supply side measures being more likely, especially with the Bank of England open to loosening monetary policy.
Deutsche Bank Senior Economist Sanjay Raja noted that the government’s fiscal headroom has grown from around £13 billion to around £18.5 billion, making tax cuts “very likely” as the first port of call.
Analyst comment
Positive news: The British Finance Minister is expected to deliver a modest package of tax cuts using a small fiscal windfall. Inflation has fallen faster than anticipated, and market expectations for interest rates are low. The Treasury plans to boost public sector productivity, potentially saving up to £20 billion per year. There will be £360 million in funding for R&D and manufacturing projects in the life sciences, automotive, and aerospace sectors.
Market impact: The market is likely to respond positively as tax cuts and increased funding for research and development are expected. The support for supply side measures and the possibility of loosening monetary policy by the Bank of England would be favorable for business growth and investment.
